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Final Proposal Elsa

proposa

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Teham Mu
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© © All Rights Reserved
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Factors Affecting Business Performance of Small

and Medium Size Enterprise (SMEs) in Addis


Ababa: (In Case of Lideta Sub-City)

MBA RESEARCH PROPOSAL

BY

ELSABETH KASSA

February, 2023

Addis Ababa, ETHIOPIA


Table of Contents
CHAPTER ONE....................................................................................................................................1
1. Introduction.......................................................................................................................................1
1.1 Background..................................................................................................................................1
1.2 Statement of the problem.............................................................................................................4
1.3 Research Question.......................................................................................................................6
1.4 Research objective.......................................................................................................................6
1.4.1 General objective......................................................................................................................6
1.4.2 Specific objectives....................................................................................................................6
1.5 Significance of the study..............................................................................................................6
1.6 Scope and limitation of the study.................................................................................................7
1.7 Limitation of the study.................................................................................................................8
1.8 Organization of the study.............................................................................................................8
CHAPTER TWO...................................................................................................................................9
2. Literature Review..............................................................................................................................9
2.1 Introduction.................................................................................................................................9
2.2 Theoretical Literature...................................................................................................................9
2.2.1 Definition of Small and Medium Enterprises................................................................9

2.2.2 Business performance.................................................................................................10

2.2.3 Factors affecting business performance......................................................................10

2.3 Empirical literature....................................................................................................................13


1. Financial factors...........................................................................................................................13
2. Managerial factors.......................................................................................................................14
3. Marketing factors.........................................................................................................................15
4. Technology factors......................................................................................................................15
5. Politico-legal factors....................................................................................................................16
6. Entrepreneur factors.....................................................................................................................16
7. Infrastructure factors....................................................................................................................17
8. Working premises factors............................................................................................................17
2.4 Conceptual framework...............................................................................................................18
CHAPTER THREE.............................................................................................................................19
3. Research Methodology....................................................................................................................19
3.1. Research design........................................................................................................................19
3.2 Sample size and sampling procedure.........................................................................................20
3.3 Data Sources and Data Collection Method................................................................................21
3.4 Data Analysis Method................................................................................................................21
CHAPTER FOUR...............................................................................................................................23
TIME & COST BUDGET...................................................................................................................23
4.1 Time Budget..............................................................................................................................23
4.2 Cost Budget...............................................................................................................................24
References..............................................................................................................................................I
Annexes................................................................................................................................................IX
CHAPTER ONE

1. Introduction

This chapter provides a brief overview of the study presented in this research paper by
introducing the reader to the key concepts used throughout the paper on background section
followed by problem statement, research questions, research objective, significance of the
research, as well as the limitations of the research will be discussed. The overview prepares
the reader for chapter 2, which is review of literatures.

1.1 Background

The organization for economic cooperation and development organization (OECD, 2004)
states that:-

‘Small and medium-sized enterprises (SMEs) are a very heterogeneous group of


business firms which are found in a wide array of business activities. It ranging from
the single artisan producing agricultural implements for the village market, the coffee
shop at the corner, the internet cafe in a small town to a small sophisticated
engineering or software firm selling in overseas markets and a medium-sized
automotive parts manufacturer selling to multinational automakers in the domestic
and foreign markets. The firms operate in very different markets (urban, rural, local,
national, regional and international); embody different levels of skills, capital,
sophistication and growth orientation, and may be in the formal or the informal
economy.’

Small and Medium enterprises (SMEs) have usually been perceived as the dynamic force for
sustained economic growth and job creation in both developed and developing countries
(Wei, Y. 2012; OECD 2005). They are playing an important role as the backbone of the
economy for both developing and developed nations (OECD 2001). Studies have suggested
that development and promotion of SMEs contribute greatly to new jobs creation, and
nation’s gross domestic product (GDP) growth (Chong, 2012; Iraj and Besnik, 2011; Aris,
2007). In many developed countries, more than 90% of all enterprises are within the SME
sub-sector while 80% of the total industrial labor force in Japan, 50% in Germany and 46% in
USA (Ayyagari, et al. 2006). Small and medium businesses contribute nearly 39% of the
country’s national income (OECD 2001). In emerging Asian countries the percentage of

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SMEs from all enterprises of Hong Kong, Thailand, Philippines, Japan, Malaysia, Singapore,
and Taiwan are 98.0, 99.7, 99.6, 98.9, 99.7, 97.7 and 96.1 respectively and their
employment contribution to total employed population is 60.0, 58.0, 70.0, 69.2, 45.0, 57.0,
and 68.8 respectively (Jarsa et al., 2011).

According to African Development Bank, ADB (2010) studies: ‘The role of the private
sector, including SMEs, as engine of growth was illustrated by the post-war recovery in
Austria and Germany and by the diverging paths of Central and East European and Baltic
countries.’

Despite such vital roles of SMEs in building a competitive private sector and contributing
significantly to economic growth and job creation, SMEs are facing numerous challenges
around the world in general and in developing countries in particular (OECD 2010).

With increased urban population dynamics of Sub-Saharan Africa (SSA), the importance of
SMEs is also growing (Zuzana, 2012). In similar fashion, in cities and towns of Ethiopia,
SMEs and the informal sector are the predominant income generating activities and thus they
have a significant contribution to local economic development and used as the basic means of
survival (Gebre-egiziabher and Demeke, 2004). However, in case of Ethiopia despite the
enormous potential importance of the SME sector to the national economy with regards to job
creation and the alleviation of poverty, many of the SMEs are unable to realize their full
potential due to the existence of different factors that inhibit their business performance
(Nega and Hussein, 2016).

According to the online business dictionary, business performance is defined as:-

‘Business performance is the accomplishment of a given task measured against pre-


set known standards of accuracy, completeness, cost, and speed. In a contract,
performance is deemed to be the fulfilment of an obligation, in a manner that releases
the performer from all liabilities under the contract.’

Performance of SMEs is defined as a firm’s ability to create action and acceptable results
(Pfeffer and Salancik, 1978). According to Alasadi and Abderahim (2007), the business
performance of SMEs can be seen from satisfaction of owners/ managers on profit, turnover
and business development.

2
A Business Performance is an interrelated set of financial and non-financial measures
designed to provide managers with vital information about the current state of the business
and its future prospects (CPMN, 1999). There exists are variety of business performance
indicators or measurements which are broadly categorized as financial and non-financial
performance measurements. Traditionally, performance measurement has been assessed on
purely financial criteria (Ramsey-Dawber 1995, Peters and Waterman 1982, Eccles 1991).
Their main advantage of the financial performance measurement is that they are easily
figured out and provide a quantitative output. However, criticisms of the financial measures
are growing. For instance, Ashton (1996) states that ‘Financial measures have a backward
looking focus that tends to promote a reactive management style and concentrate mainly on
immediate rather than long-term goals.’

Among the financial business performance measures developed by different researchers


according to Kangari et al. (1992). Profitability, Liquidity, and Efficiency (Revenues to
working capital), According to Kay (1993) Size: Turnover, Profit, Capitalization; Growth:
Sales Growth %, EPS growth %, PE ratio; Added value: Output (revenues), Inputs (labor,
capital and material costs); Return: Margin, ROI, ROE, and Shareholder Return. (Kaka et al.
1995) Financial Liquidity and activity ratios, Profitability ratios, Coverage ratios.

Non-financial measures on the other hand focus on competitive issues, such as


product/service quality, customer satisfaction and business processes, has resulted in
companies turning to non-financial measures. These measures, in addition to providing the
management with a set of tools for continuous improvement, encourage a proactive
management style (Bititci 1994). According to Baldridge Award (MBNQA 1988), the 7
pillars Leadership, Information and analysis, Strategic quality control, Human Resource,
Management, Process quality, Quality and operational results, Customer focus and
satisfaction.

Several previous researches studied and examined various business factors that
influence/affect business performance of enterprises. Numerous factors affect the
performance of SMEs including entrepreneurial aspect, competency of human resource,
innovativeness and sustainability strategy. Among the most recent studies: ‘Business
Information Services, Access to Finance, Availability of Management Experience, Access to
Infrastructure, Government Policy and Regulations was considered as factors’ (Kamunge et
al., 2014). A study in Thailand considers the following as factors that influences business

3
performance of SMEs: ‘SMEs characteristic, management and know how, products and
services, Customer and Market, the way of doing business and cooperation, resources and
finance, Strategy, and external environment’ (Chittithaworn et al., 2011). A study from
Algeria considers Legal and political framework, Access to external financing, Human
resources capacities, Entrepreneur characteristics, Management capacities, Marketing skills,
Technological capacities, and SMEs internal factors as a factor affecting business
performance (Bouazza et al., 2015). Another study from Romania determines the factors as
Strategy, Information Technology, Structure, Leadership, Innovation and development,
Employees, Corporate governance, quality, Performance measurement and External
environment. Another recent study, Admasu (2012) considers ‘Politico-legal factors,
Working premises, Technological factors, Infrastructural factors, Marketing factors and
financial factors as a factor for business performance.’

1.2 Statement of the problem

Though the contribution of SMEs to nation’s economic development is widely known and
witnessed in several European and Asian countries as well as in USA, yet a number of factors
challenge their business performance particular for those of the developing countries (OECD,
2010).

There are a number of researches that have been conducted to study the factors that affects
the business performance of small and medium enterprises SMEs in foreign country
especially in South East Asia countries like Thailand, Taiwan, Malaysia, Indonesia, etc.; in
Africa like Egypt, Nigeria, Tanzania, Kenya, Algeria, Namibia etc.; and in Eastern Europe
like Romania, Croatia and in some Arab countries like Oman. However, there exist wider
conceptual dimensions on framing the factors affecting SMEs business performance and the
dimensions of measurement of business performance from researcher to researcher and
country to country. The definition of small and medium enterprises were also differ from
country to country as the definition is highly depends on the economic development of
countries.

Trying to access similar researches via digital scholars’ articles on Google scholar articles
and academic researchers in reachable university like AAU digital library, the researcher has
found some thesis researches conducted in Ethiopia. However, many of them were about
micro and small and only few were on small and medium size enterprises. Among the similar
researches that the researcher accessed were MBA thesis submitted to Addis Ababa

4
university entitled ‘factors affecting performance of micro and small enterprises in Addis
Ababa Lideta and Arada sub city’ (Admasu, 2012); “Assessment of the Challenges of Micro
and Small Scale Enterprises to Contribute to Sustainable Development: the case of
Manufacturing Enterprises in Addis Ababa, Ethiopia” (Yodit Gebreyohannes, 2015); “The
Challenges of Micro and Small Enterprises and Business Development Service” (Bizusew
Kebed, 2015); “Assessing Factors Affecting Transitional Development Of Small Scale To
Medium Scale Enterprise In Sebeta Town: Challenges, Opportunities And Prospects.”
(Mekonnen Lenjisa, 2014); “Performance of Micro and Small Enterprises and their Role in
Enhancing Local Economic Development: A Case Study in Gullele Sub City of Addis
Ababa” (Munira Sherefa, 2012); “Problems Of Micro And Small Enterprises In Addis Ababa
The Case Of Kirkos, Kolfe, And Yeka Sub Cities” (Weldegbriel Mezgebe, 2012); Entitled
“Factors Constraining The Growth And Survival Of Micro And Small Enterprises In Burayu”
(Abiyu Jiru, 2011); “Finance As Success Or Failure Factor For Micro And Small Enterprises
In Addis Ababa: The Case of Arada Sub-City” (Brhane Tadesse, 2011) and a research MSc
thesis submitted to Bahirdar University entitled ‘factors affecting the performance of women
entrepreneurs in micro and small enterprises in Dessie town’ (Mulugeta, 2010) and another
MSc thesis submitted to Haromaya university entitled ‘performance of micro enterprise and
its determinant factors: the case of hosanna town, Hadiya zone’ (Abraham, 2013). Mekonnen
Lenjisa (2014) has done his related thesis research on small and medium in Sebeta town and
others did on micro and small enterprises.

Only few of studies conducted in Ethiopia that the researcher has accessed, had used
causal/explanatory research design while most of them used descriptive research design
methodology. Most of the researchers do not use the appropriate business performance
measurement and weren’t supported by theories and empirical studies. The research study
area and study population will also different. Hence, the researcher found that there is
research gaps on this particular topic in Addis Ababa in general and Lideta sub city in
particular.

Moreover, the existence of wider dimensional differences of business performance


measurement and its influencing factors exhibited in various researchers, the differences in
research results from country to country, the differences in definitions of SMEs indicates that
there exists both a conceptual and contextual gaps and I also found that there is research
vacuums in the research topic especially regarding the medium size enterprises in Ethiopia
specifically in Addis Ababa. Therefore, this thesis proposal will intended to address this

5
vacuum and will try to fill the knowledge gap by providing the key factors affecting the
business performance of SMEs operating in Addis Ababa Lideta sub city.

1.3 Research Question

The research question of the study will focus on the following points.

 What is/are potential factors that affect the business performance of small and
medium size enterprises (SMEs)?
 What determine the intensity of factors to influence/affect the business performance
of SMEs?
 How to know solutions for overcoming the influence of the factors on the business
performance of SMEs?
1.4 Research objective
1.4.1 General objective

The general objective of the study will be to determine the factors that influence/affect the
business performance of small and medium enterprises operating in Lideta sub city of Addis
Ababa.

1.4.2 Specific objectives


1. To examine the potential factors that affects the business performance of small
and medium size enterprises (SMEs)
2. To determine the intensity of factors to influence/affect the business
performance of SMEs
3. To know solutions for overcoming the influence of the factors on the business
performance of SMEs
1.5 Significance of the study

The growing intensity of international competition and globalization is affecting the growth
of SMEs in developing economies. The SMEs are the engines of growth and development of
the developing countries like Ethiopia where poverty and unemployment rates are
widespread. Effective functioning and well performing of these enterprises is considered as
one of the important strategies to meet the poverty reduction and job creation in the country.
The number of SMEs in Ethiopia is steadily growing. But, much more important than their
number is their performance, current status, stage and pace of development. The rate of
development of SMEs in Ethiopia is very slow. This could be attributed to several factors.

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The business environment in which SMEs are operating today is different. Considerable
changes have taken place in the world economic order during the past two or three decades.

It is generally accepted that SMEs are becoming increasingly important in terms of


employment, wealth creation, and the development of innovation. However many problems
encounter SMEs and as a result, many firms perform dismally and fail to grow. In addition it
is generally known and accepted that there is a high mortality rate of SMEs within the first
two years. Given this high failure rate, it becomes vital to research the factors required to
enable the SMEs to survive and indeed progress to the growth phase of the organizational life
cycle.

Therefore, studying the factors that influence the business performance of firms responsible
for job creation, economic development, and innovation will be important for both business
firms to engage in solving their performance problem by pinpointing and prioritizing the
critical factor influencing the business performance among other factors. It also helps the
policy makers to solidify policy ratification as well as amendment and for executers to
solidify their support on the most critical performance inhibiting factors for SMEs. The
research findings will also contribute for academicians, consultants and institutions to focus
on the development of trainings and development program to support the SMEs to overcome
their challenges and it may help initiate academic researches to further investigate by
widening the study area.

Moreover, the research may fill the research gaps otherwise will enrich the existing literature
on the area of the factors that affects/influences the business performance of SMEs and it
may provide comprehensive understanding on the Ethiopian SMEs context of critical factors
inhibiting business performance. The research may also help future researchers in provision
of information as secondary data or serve as literature for future use in the academic arena.

1.6 Scope and limitation of the study

This research will entirely focus on the determination of factors that affect business
performance of Small and medium size enterprises (SMEs) located and operating in Addis
Ababa Lideta sub city. The research participants of the study were encompassed the general
managers and/or owners of the enterprises. Time, budget and the reluctant behaviour of
business enterprises managers/ owners to provide information will be assumed the limitations
for this research.

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1.7 Limitation of the study

As known in conducting research there may be different constraints will face. Among the
constraints some of the potentials assumed are lack of time, sufficient secondary data
availability and willingness to provide the information from the respondents, lack of budgets
can be listed. But, the researcher will aim to overcome the problem as much as possible by
using resources efficiently.

1.8 Organization of the study

Chapter two dealt with the literature review that discussed about the review of related
conceptual and empirical literatures conducted on this specific issue. Section 2.1 of the
chapter two will discuss the theories existed about small and medium enterprises, Business
performance and the factors affecting business performance of SMEs, and section 2.2 of the
chapter dealt with the empirical findings of the factors affecting the business performance of
business enterprises conducted by different researchers globally. Chapter three will focus on
the research methodology used and under this chapter the research approach and design, the
sample size and sampling procedure, data sources & data collection method, the data analysis
method deployed, and the reliability and validity of the data collection instrument also
explained, analysed, and discussed. Chapter four will be deal with the research results and
discussion. Both descriptive and inferential statistic results will be used and interpreted in a
more logical way. Chapter five dealt with the summary, conclusion and recommendation of
the research. The summary of the major findings will be presented first and conclusion and
recommendation followed.

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CHAPTER TWO

2. Literature Review
2.1 Introduction

This chapter presents the review of different theoretical literature and empirical studies in the
areas of small and medium enterprises business performance and factors that affect the
performance of the enterprises operating everywhere in the world and in Ethiopia.

2.2 Theoretical Literature


2.2.1 Definition of Small and Medium Enterprises

Olabsi et al (2011) states that ‘There is no single criterion for classifying business enterprises
as small or medium scale globally.’ In a study carried out by International Labor
Organization (ILO, 2005) over 50 definitions were identified in 75 different countries. The
term SME’s universally stands for small and medium-sized enterprises but there is no
consensus on the definition of SMEs (OECD, 2010).

However, evidence from literature shows that in defining small- scale business, reference is
usually made to some quantifiable measures such as: number of people employed by the
enterprises, investment outlay, the annual turnover (sales) and the asset value of the
enterprise or a combination of these measures. Thorough the elements to be considered in the
course of defining SMEs the definition widely differ in different regions, from country to
country because it depends on the phase of economic development as well as their prevailing
social conditions. Some common indicators employed in the various definitions include total
assets, size of the labor force employed, and annual turnover and capital investments (Baenol,
1994; OECD, 2004). There are several definitions of the term small and medium enterprises
(SMEs), varying from country to country.

In Ethiopia according to Ethiopian Federal Micro and Small Enterprises agency (FMaSE,
2011) SMEs are defined by: Small enterprise is those enterprises hired 6 up to 30 employee
or total asset amount birr 100,000 up to 1.5 million birr for industry sector and 50,000 up to
500,000 not greater than for services sector. Medium Enterprise are enterprises found in
manufacturing and service sectors of the Ethiopian economy with a total asset more than 1.5
million birr and a total asset of more than Birr 500,000 respectively (Addis Ababa MSE’s
development agency bureau, 2011 as cited on Addis Ababa Communication office bureau).

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However, there is no yet a clear separation between a medium and large enterprises in terms
of capital, number of workers etc.

2.2.2 Business performance

Performance measuring is usually carried out by subjective evaluation of the business entities
themselves, either by evaluating their satisfaction with the achieved indicators of
effectiveness and efficiency (meeting expectations, i.e. Plans), or by benchmarking
themselves against their competition (Dess, et al. 1984)

Lebans & Euske (2006) as it was cited in Corina, G. et al. (2011) provide a set of definitions
to illustrate the concept of organizational performance:

 Performance is a set of financial and nonfinancial indicators which offer information


on the degree of achievement of objectives and results (Lebans & Euske 2006; Kaplan
& Norton, 1992).
 Performance is dynamic, requiring judgment and interpretation.
 Performance may be illustrated by using a causal model that describes how current
actions may affect future results.
 Performance may be understood differently depending on the person involved in the
assessment of the organizational performance (e.g. performance can be understood
differently from a person within the organization compared to one from outside).
2.2.3 Factors affecting business performance

SMEs performances according to Komppula (2004) are constrained by two major factors:
‘internal factor such as entrepreneur competencies, commitment, resource, strategic choice
and external factor like competitors, culture, technology, and infrastructure and government
policy.’ Understanding determinant factors of SMEs performance is considered as an
important area of focus in Enterprises (Rosli, 2011).

Despite the potential role of SMEs to accelerate growth and job creation in developed and
developing countries, a number of bottlenecks affect their ability to realize their full potential.
SME development is hampered by a number of factors. A set of constraints, which is not
intended to be exhaustive, is identified below.

Input Constraints: SMEs face a variety of constraints in factor markets (Kayanula and
Quartey, 2000

10
 Debt and Equity: SMEs have limited access to capital markets, locally and
internationally, in part because of the perception of higher risk, informational barriers,
existence of high collateral to financial institutions, credit rating, accounting and
auditing, economies of Scale and the higher costs of intermediation for smaller firms.
As a result, SMEs often cannot obtain long-term finance in the form of debt and
equity.
 Labor Market: An insufficient supply of skilled workers can limit the specialization
opportunities, raise costs, and reduce flexibility in managing operations.
 Information and Technology: SMEs have difficulties in gaining access to appropriate
technologies and information on available techniques. This limits innovation and
SME competitiveness. At the same time, other constraints on capital, and labor, as
well as uncertainty surrounding new technologies, restrict incentives to innovation.
 Production inputs: SMEs face constraints in the availability of production inputs. For
instance, better quality raw materials are generally exported or are available only to
larger firms and their suppliers tend to be oligopolies. Inadequate infrastructure and
weak provision of basic services such as transportation, energy, urban planning and
production sites represent particular impediments for SMEs.
 Lending infrastructure: The lending infrastructure includes the information
environment, the legal, judicial and bankruptcy environment, and the tax and
regulatory environments. All of these elements may directly affect SME credit
availability by affecting the extent to which the different lending technologies may be
legally and profitably employed. The final element, the regulatory environment, may
also restrict SME credit availability indirectly by constraining the potential financial
institution structure (Allen and Gregory, 2005).

SME credit availability indirectly by constraining the potential financial institution structure
(Allen and Gregory, 2005).

 Domestic Markets: The diminished role of the state in productive activity and
renewed private investment has created new opportunities for SMEs. Nonetheless,
limited access to public contracts and subcontracts, often because of cumbersome
bidding procedures and/or lack of information, inhibit participation in these markets.
Also, inefficient distribution channels and their control by larger firms pose important
limitations to market access for SMEs.

11
 International Markets: Previously insulated from international competition, many
SMEs are now faced with greater external competition and the need to expand market
share. Limited international marketing experience, poor quality control and product
standardization and little access to international partners, however, impede expansion
into international markets.

Management Constraints: The lack of economies of scale and competition for one of the most
scarce resources, management know-how, place significant constraints on SME development
(Gockel and Akoena, 2002).

 Management skills and training: Even though SMEs tend to attract motivated
managers, they can hardly compete with larger firms. The scarcity of management
talent, prevalent in most countries of the region, has a magnified impact on SMEs.
 Consulting Services: The lack of support services or their relatively higher unit cost
can hamper SME efforts to improve their management because consulting firms often
are not equipped with appropriate cost effective management solutions for the scale of
SMEs.

Regulatory Constraints: Although wide ranging structural reforms have improved prospects
for enterprise development, many issues remain to be addressed at the firm level (Kayanula
and Quartey, 2000).

 Taxation & Tariffs: Complicated and inefficient tax codes that include cascading sales
taxes and stamp taxes are least favourable to SMEs. At the same time, the tariff and
nontariff barriers which favour larger firms that play a role in policy making are often
biased against SMEs (Kayanula and Quartey, 2000).
 Legal: High start-up costs for firms, including licensing and registration requirements
can impose excessive and unnecessary burdens on SMEs. The absence of antitrust
legislation favours larger firms, while the lack of protection for property rights limits
SME access to foreign technologies.
 Labor Markets: Inflexible labor codes and other indirect labor costs bear most heavily
on SMEs, raising their cost of doing business and depriving them of the flexibility to
adapt.

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2.3 Empirical literature

Thibault et al. (2002) suggest that ‘factors influencing business performance could be
attributed to personal factors such as demographic variable and business factors such as
amount of financing, use of technology, age of business, operating location, business
structure and number of full-time employees as important factors in examining the
performance as small scale business operators.’

The most comprehensive summary of factors influencing performance was noted by Theo, et
al. (2007) to include: ‘individual characteristics, parental influence, business motivation and
goals, business strategies, goals and motives, networking and entrepreneurial orientation.
Others include environmental factors.’

Performance can be characterized as the firm’s ability to create acceptable outcomes and
actions (Pfeffer & Salancik 1978). Strategically, firm performance is often referred to as firm
success or failure (Dess & Robinson 1984; Ostgaard & Birley 1995).

2.3.1 There are wider dimensional measures of organizational performance (Campbell


1976; Brush & Vanderwerf 1992; Matikka 2002). Performance can be measured
by growth (turnover, number of employees, market share), profitability (profit,
return on investment), and survival (Storey 1994; Smith et al.. 1988; Robinson et
al.. 1984; Dess & Robinson 1984).
1. Financial factors

Berger, et al. (1998) states that: ‘The role of finance has been viewed as a critical element for
the performance of small and medium sized enterprises. Previous studies have highlighted the
limited access to financial resources available to smaller enterprises compared to larger
organizations and the consequences for their performance and development.’

According to Asma Bouazza etal (2015) Lack of access to external financing is considered a
major challenge to the growth of SMEs, and it has accounted for high rates of failure among
those SMEs. In another study Akinruwa, T. et al., (2013) finance and performance in SMEs
are significantly related with 0.000 at 5% significant level. This emphasizes that finance has a
determinant effect on the business performance. Banabo, et al., (2011) and Olabisi, et al.
(2011) also found that finance has a significant effect of the business performance.

13
Lack of access to external financing is considered a major challenge to the growth of SMEs,
and it has accounted for high rates of failure among those SMEs as revealed by several
studies. According to Shah et al. (2013), financial institutions behave more cautiously when
providing loans to SMEs, and SMEs are usually charged comparatively high interest, high
collateral and loan guarantees. Krasniqi (2007) finds that loan policies and collateral
requirements discourage firms from obtaining loans from banks. Both developing and
developed countries, small firms have less access to external financing, which leads small
firms to be more restrained in their operations and growth compared to large firms.

A study done by Berger, et al. (1998) in developing countries provides further evidence that
SMEs face greater financing obstacles than large firms do. Ayyagari et al. (2006) showed that
financing, crime, and political instability directly affect the rate of growth of small firms,
with financing being the most significant constraint affecting small firms’ growth. Rocha et
al. (2011) analyse the most binding constraint on firm growth in developing countries: they
find that each country faces a different set of constraints and that these constraints also vary
by firm characteristics, especially firm size. However, across all countries, access to
financing is among the most binding obstacle while other obstacles appear to matter much
less.

2. Managerial factors

Many SMEs owners or managers lack managerial training and experience. The typical owner
or managers of small businesses develop their own approach to management, through a
process of trial and error. As a result, their management style is likely to be more intuitive
than analytical, more concerned with day-to-day operations than long-term issues, and more
opportunistic than strategic in its concept (Aylin, et al. 2013)

Several studies have considered the management capacities of the top management team as
key factors for small business growth. According to Olawale and Garwe (2010), management
capacities are sets of knowledge, skills, and competencies that can make the small firm more
efficient. Singh et al. (2008) emphasize that management skills are necessary for SMEs to
survive and achieve growth. Aylin et al. (2013) state that management skills are a crucial
factor for the growth of SMEs and that the lack of management skills is a barrier to growth
and is one of the factors that can lead to failure. Pasanen (2007) suggests that the growth
pattern of small firms is associated with their managerial capacities. Bhide (1996) notes that a

14
shortage of core competence and a skilled top management team is one of the main
challenges faced by SMEs.

3. Marketing factors

The market role of a business entity (Tse and Sin, 2004; Ishaq, 2002; Kotler 1992) can be
observed as entity’s current position/state which determines the choice of the strategy, but
also as its set target/result. Market roles result from the strength of businesses on the market
(share size and competitiveness position), and are characterized by the level of innovation
and business pro-activeness necessary to achieve and maintain a certain position.
Accordingly, in the established division of market roles (Kotler, 2003) two drawbacks can be
identified: the role of nicher is defined by the criterion of where/in what market segment
certain business operates, and not by its position in relation to its competition; a lack of the
monopolist role for situations when an entity is the only one on the market/market segment.

Marketing skills has been considered as one of the most effective factor to firm survival and
growth. According to Van Scheers (2012) the lack of marketing skills has a negative impact
on the success of small businesses.

4. Technology factors

Drucker (1985) noted that new technologies improve efficiency, enable greater production,
and are a source of profit for SMEs. According to Morse et al. (2007), technological
capabilities benefit SMEs in several ways: they enhance SME efficiency, reduce costs, and
broaden market share, both locally and globally. As noted by Lee (2001), a small business
that adopts greater levels of technological sophistication can be expected to grow more
rapidly than a similar firm that does not. Romijn (2001), and Yusuf et al.. (2003) point out
that low technological capability hinder and discourage SMEs from fully reaching their
potential.

Improved technology allows the firm to produce with a more efficient bundle of resources
that reduce cost, and/or allows the creation of improved products or even completely new
products. Such firm would be more likely to be in a position to surpass competition, reach
new markets and expand. Variyan and Kraybill (1994), in a study of firms in Southern United
States, found that the majority of managers of firms analyzed considered that the use of
technology as a critical element of their competitive advantages. Those firms, which placed
more emphasis in the use of new technology, had higher growth rates than firms that did not

15
view technology as a critical factor. Additionally, in a cross sectional analysis of industries,
Birley and Westhead (1990) encountered evidence that supports the hypothesis that firms
with newer technology in the major manufacturing lines were associated with higher levels of
growth and performance.

5. Politico-legal factors

Research by Asma Bouazza, et al. (2015) observes that governments that are not concerned
with the promotion of small enterprises should examine the impact of its policies and
programs on the small businesses. Robert Galan, et al. (2014) makes a similar observation
that government regulation about wages, taxation, licensing and others are among the
important reasons why the informal sector business develops. Without careful attention,
government policies could crush the small business sector in any economy.

According to Lumpkin and Dess (1996) the growth of SMEs are affected by its business
climate. Chuthamas C., et al. (2011) noted that an unfavorable business climate has negative
affect on small firm growth. Brown (2007) identified competition as one of the major
hindrances to the growth of small firm. Davidsson (1989) noted that an unfavorable tax
system, complicated rules and regulations can heavily hamper small firms’ growth. Krasniqi
(2007) showed that corruption is a major source of the rise in unfair competition.

6. Entrepreneur factors

Entrepreneur's personality (owner's and/or managers) is a specific internal factor. All studies
have shown it has a significant impact on existence and operation of businesses, particularly
SMBs (Zhang, et al. 2008). Specifically, its strong influence on the business strategic
framework has been established (vision, mission, business orientation, culture and goals),
which, indirectly and implicitly, affects all the components of the internal environment,
strategy and performance. The problem of analyzing this factor is reflected in the complexity
of deeper analysis (of motives, attitudes, personality traits ...), that would require an expert
psychological approach. Therefore, the analysis is usually reduced to demographic
characteristics that certainly cannot give a complete and thorough insight into the personality
of the entrepreneur.

Based on their powerful and influential position in their firms, entrepreneurs’ subjective
worldviews greatly affect their firms’ choice of strategic direction (Sidika, I. 2012) and
therefore will affect the firm growth. Furthermore, the entrepreneur’s characteristics such as

16
age, gender, motivation, experience, educational background, and risk-taking propensity,
preference for innovation, mindset, and personality can have a big influence on the firm’s
performance and success, and the growth of the SMEs can be hugely dependent on him.

Chuthamas C., et al. (2011) studied and found Entrepreneurs in successful SMEs and those
in failed SMEs thought that pretty much the same factors are the most important for business
success, and held the same views on the factors to be avoided in business.

In the study of Krishna Moorthy et al., (2012) there is a significant negative relationship
between ineffective entrepreneurship and performance of SMEs in the manufacturing
industry in Malaysia. In his study he found out that an effective entrepreneurship with skills
and experiences will lead to a higher innovation as well as competitiveness in the business
performance of SMEs, and an ineffective entrepreneurship will lead to bad performance of
SMEs. His study was consistent with similar previous study researches of Fairoz et al.,
(2010) and Talaia et al., (2011).

7. Infrastructure factors

The inadequacy of the physical infrastructure is a principle cause of low levels of investment
and unsatisfactory performance of small and micro enterprises. World Bank group
international finance corporation enterprise survey 2011 has identified poor infrastructure as
a critical factor that constrain business performance in Ethiopia. The infrastructure problem
includes poor state of roads, inaccessibility to land, work space, electricity and utility. Lack
of allocation of suitable land to SMEs in most urban and rural areas is a major impediment to
growth and development. Inaccessibility to land and lack of property rights hamper access to
infrastructure and utilities by line SMEs (Mbugua et al. 2014). On his study Akinruwa, T. et
al. (2013) found a critical factor affecting performance is infrastructure with significant level
of 0.001, it shows that with absence of amenities like; power, good road network, effective
communication system and readily available market that can absorb the finishing products
business may not survive.

8. Working premises factors

According to Heikky N. Amwele (2013) entitled empirical investigation into the factors
affecting the performance of SMEs in the retail sector in Windhoek, Namibia; he found that
over ninety percent (90.9%) of the 22 respondents, revealed that rent or lease a place for their
business in Windhoek has hinder their performance. He found that it was expensive to lease a

17
working place for business use in their current locations; therefore most SMEs are unable to
grow financially as the large portion of the income goes in the rental expenses. Access to land
for business use in Windhoek was one also hinders business. According to the World Bank
group international finance corporation enterprise survey report (WBGIFC, 2011) access to
land (working premises) is the second major challenges/inhibiting factors of performance for
both small and medium size enterprises in Ethiopia. Different government reports and
workshop participants indicated that working premises is the problem for small and medium
size enterprises as government focus mainly on micro enterprises. According to Ethiopian
Economics Association (EEA) Research Brief (EEA, 2015) working and selling premises are
the problems.

2.4 Conceptual framework

The conceptual framework (Figure.1) shows the relationship that exists between small and
medium size business enterprises (SMEs) business performance which is the dependent
variable and the factors that affects it which are independent variables identified as Financial
factors, Marketing factors, Management factors, Entrepreneur factors, Technological factors,
Politico-legal factors, working premises factors and infrastructure factors. This conceptual
model has developed by previous researchers and the researcher adopts the model with only
fewer modifications. It is adopted from Admasu Abera (2012).

Management
Technological
Factors
Factor (TEF)
(MNF)

Financial
Factors Infrastructural
(FNF) Factors
Performance of (IFF)
SMEs (PFE)
[Profit, Capital growth, Sales
Marketing Growth, Operational
Factor Efficiency and Employee Working
(MRF) Loyalty and turnover] premises
Factors
Entrepreneurial Politico-legal (WPF)
CHAPTER THREEFactors Factors
(EPF) (LPF)

18
3. Research Methodology

This chapter will present the research methodology will applied in conducting the study in
order to achieve the study’s objective which will be find out the factors that affect the
performance of small and medium enterprises in Addis Ababa city of Lideta sub city. The
chapter will be structured into research design, sample size and sampling procedure, data
sources and data collection methods and finally data analysis methods.

3.1. Research design

The research approached employed in this study was quantitative research approach that was
suitable for the research objective to test the hypothesis. The research design used to test the
eight hypothesis that the eight factors has positive effect on business performance of SMEs
was causal/explanatory research study concerned with determining the cause and effect
relationship but it had also employed descriptive study. However, as the objective of the
study was to examine the factors that influence the business performance of SMEs, the study
can be considered mainly as explanatory/causal. This study was carried out to ascertain the
implication of each independent/predictor variables (financial factors, management factors,
market factors, Politico-legal factors, entrepreneurial factors, infrastructural factors,
technological factors, and working premises factors) towards the business performance
(dependent variable) of SMEs operating in Addis Ababa Lideta sub city. The functional or
mathematical representation (model) was then formulated in the following form:

SMEs business performance (PFE) = f (Financial factors (FNF), Marketing factors (MRF),
Management factors (MNF), Entrepreneur factors (EPF), Technological factors (TEF),
Politico-legal factors (PLF), infrastructure factors (IFF) and working premises factors
(WPF)). Mathematically this function was expressed as:

PFE = β0 + β1*FNF + β2*MRF + β3*MNF + β4*EPF + β5*TEF + β6*PLF + β7*IFF +


β8*WPF

Where: β0, is the constant which is the intercept of SMEs business performance.
β1, β2, β3, β4, β5, β6, β7, and β8 are the regression coefficients of the Financial

19
Factors (FNF), Marketing factors (MRF), Management factors
(MNF), Entrepreneur factors (EPF), Technological factors
(TEF), Politico-legal factors (PLF), Infrastructure factors
(IFF), and Working premises factors (WPF) respectively.

3.2 Sample size and sampling procedure

The study population for the research in SMEs operating in Addis Ababa Lideta sub city
which are actively operating are totalled1282 (according to Lideta Sub City office). The total
sample size will be determined using probabilistic sample size determination method
developed by Watson Jeff (2001).

𝐧= P(1 − P) = 0.5(1 − 0.5)


2
A + P(1 − P) 0.052 + 0.5(1 – 0.5) = 311
Z2 N 1.962 1282
R 0.95

/Note: P = 0.5, Z= 1.96, A = 0.05, and R = 0.95

Where:

n= sample size required

N= number of population

P= estimated variance in population, as a decimal: (0.5 for 50-50, 0.3 for 70-30)

A= Precision desired, expressed as a decimal (i.e., 0.03, 0.05, 0.1 for 3%, 5%, 10%)

Z = based on confidence level: 1.96 for 95% confidence, 1.6449 for 90% and 2.5758 for 99%

R = Estimated Response rate, as a decimal

Based on the sample size, the samples of SME’s is stratified by their sectors that they are
engaged and categorized by the sub city and ministry of trade as Transport service,
warehouse service and communication works; Manufacturing; Agriculture, hunting, forestry
development and fishing; Mining and quarrying; Electric, fuel and water supplying; Society:
Social and private services; Constriction works; Finance, insurance and real estate business;
and Retail and wholesale trade, vehicle repair service, home and hotel appliance, fixture and

20
furniture import and export trade. The sample size of each strata/sector of SMEs will be
determined using population proportionate sampling (PPS) methods in order to represent the
total study population (Table 3-1). Respondents were selected from sampling frame using
simple random sampling technique from each strata (sector) of small and medium enterprises
operating in the sub-city.

3.3 Data Sources and Data Collection Method

The population for this research survey will be small and medium size enterprises operating
in Addis Ababa city Lideta sub city. Simple random sampling technique was used to select
respondents from the target population to ensure that each participant had an equal chance of
selection.
Primary data will be gathered through the use of highly structured self-administered
questionnaire. The questionnaire will consist of three parts. The first part was comprised of
the general information on business enterprises including demographic, characteristic, and
profile information of the respondents. The respondents were asked to rank statements on
contextual condition related to each performance factor faced by the respondents in the part
two. This part was consist of questions which were intended to measure factors of business
performance adapted from Admassu Abera (2012) and modified by the author accordingly; It
used a 5-point liker scale anchored by strongly agree to strongly disagree (5 = strongly agree,
4 = agree, 3 = undecided, 2 = disagree and 1= strongly disagree). In the third part, the
respondents were asked to score the importance of perceived business performance
measurements for their business, using five-point liker scale anchored by 5= strongly agree
and 1= strongly disagree were applied to measure the perceived business performance. A
total 311 of paper based questionnaires will be distributed to SMEs directors, managers or
management team.

3.4 Data Analysis Method

The data will be collected in this study mainly quantitative but it also had qualitative data that
requires the use of both descriptive and inferential statistical data analysis methods.
Therefore, the collected Likert scale data were edited, coded, and finally analyzed by using
both descriptive and inferential/parametric statistical tools. For the data regarding
characteristics of the SMEs and the general information of respondents, descriptive statistical
analysis (frequency, percentage, mode and charts) was employed; and for the data related to

21
the factors affecting the business performance, both descriptive (mean, range, minimum and
maximum, SD) and inferential statistics (regression, correlation , t test, ANOVA and F-test)
were employed. Statistical Package for Social Science, (version SPSS 20) was used for
facilitating the computation of both the descriptive and the inferential statistical results.

CHAPTER FOUR

22
TIME & COST BUDGET

4.1 Time Budget

Time schedule
Proposed Project Activities
February March April May June
Submission of draft Proposal including Data
Collection Tools for comments
Submission of Final draft Proposal including Data
Collection Tools and Getting Approval from
Respective Advisors
Field work (Data collection)

Data analysis and Report Writing

Submission of First draft thesis to Respective


Advisors
Corrections and Modifications (Advisor and Advisee)

Submission of Final draft thesis to the Department


Thesis defence

Submission of Final Thesis after Carrying-out


Corrections as per directions of Defence Panel.

4.2 Cost Budget

23
No Item of Expenditure Unit cost description Total cost
1 Travelling expenses 1 person*2500 br 4,000.00
2 Field subsistence (perdium) 35 days*210 br 7,350.00
3 Research assistant wages 2 person*150 br*15 days 4,500.00
paper 6ram*150=900
4 Stationery 1notebook*200=200 1,100.00
5 Printing services 1000 pages*1br 1,000.00
6 travelling bag 1*2000br 2,000.00
7 Photocopy 232 respondents*5page*1br 1,160.00
8 Mobile card 1person*1000 1,000.00
9 Miscellaneous expenses 2,890.00
Total 25,000.00

24
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VIII
Annexes
Annex A. Data collection instrument

Thesis Research Questionnaire


Select College
School of Graduate Studies
MBA Business Administration

Dear respondent, I am a graduate student in master of business administration at Select


College. Currently, I am undertaking a thesis research entitled ‘Factors Affecting the
Business Performance of Small and Medium Enterprises in Addis Ababa: In case of Lideta
Sub-Cities’.
Dear sir/Madame, You are one of the respondents selected to participate on this study. I will
request your assistance in providing me accurate and complete information so that the finding
on the factors affecting the performance of small and medium enterprises in the sub-cities
will be representative and lead to accurate conclusion. Your participation is entirely voluntary
and your personal information and your entire response will be completely anonymous.
Finally, I assure you that the information that you provide me through the questionnaire will
be kept confidential and only used for the aforementioned academic purpose. No individual’s
responses will be identified as such and the identity of persons responding will not be
published or released to anyone. Thank you in advance for your kind cooperation and
committing your time.

Sincerely,
Elsabeth Kassa

Instructions:
Please provide your response answers with a check mark (√) in the appropriate block
provided.

IX
SECTION-1: GENERAL INFORMATION ON RESPONDENTS

1. Please specify the business sector you are engaged in

___________________________________________________________________

2. Please specify your Gender

A. Male B. Female

3. Please specify your age

A. Blow 20 B. 20-30 C. 31- 40 D. 41- 50

E. 51 & above

4. What is your Position in the organization?

A. An owner-manager B. A professional manager

5. If you are a paid professional manager: How many years altogether have you been in the

Service of the firm? _____________ Years

6. What is your highest level of education?

A. First Degree C. Diploma or TVET E. Secondary

B. Master’s degree D. Certificate F. Elementary

G. Read and write

If your education level is not included in the above levels, please write the highest grade

Level you have completed ________________________

7. Experience years __________________________

X
SECTION-2: FACTORS AFFECTING THE PERFORMANCE OF SMALL and
MEDIUM ENTERPRISES: The major factors that affect performance of SMEs are listed
below. Please indicate the degree to which these factors are affecting the performance of your
business enterprise. After you read each of the factors, evaluate them in relation to your
business and then put a tick mark (√) under the choices below.
Where, 5 = strongly agree, 4 = agree, 3 = undecided,
2 = disagree and 1= strongly disagree

1. Please indicate the degree to which you agree with the following statements concerning
financial factors.
S.N Financial Factors 5 4 3 2 1
1.1 Credit institutions are insufficient to access loans easily.
1.2 We have no/poor cash management system.
1.3 We experience frequent working capital shortage.
1.4 We are required a high collateral from banks and other
Lending institutions.
1.5 The interest rate charged by banks and other lending
Institutions are unreasonably high.
1.6 The lending criteria of banks and other financial
institutions is stringent

2. Please indicate the degree to which you agree with the following statements concerning
management factors.
S.N Management Factors 5 4 3 2 1
2.1 There is lack of clear division of duties and responsibility
among employees in the firm.
2.2 The communication in the firm is ineffective
2.3 The employee handling practice is inadequate and
improper.
2.4 There is lack of well trained and experienced employees.
2.5 There is lack of strategic business planning in the firm.

3. Please indicate the degree to which you agree with the following statements concerning
marketing factors.
S.N Marketing Factors 5 4 3 2 1
3.1 We have inadequate market access for my product/service.
3.2 We have problems of formulating marketing strategy.
3.3 We have lack of market information and demand
forecasting practices.
3.4 There exists fierce foreign and domestic competition.
3.5 We have lack of promotion to attract potential customers.
3.6 We have poor customer relationship and handling practice.

XI
4. Please indicate the degree to which you agree with the following statements concerning
entrepreneurship factors
S.N Entrepreneurial Factors 5 4 3 2 1
4.1 There is lack of motivation and self-drive of business owner.
4.2 There is lack of initiative to take calculated business risk.
4.3 There is lack of persistence and courage to take responsibility
for one’s failure.
4.4 There is lake of initiative to assess ones strengths and
weakness.
4.5 There is lack of entrepreneurship training.
4.6 There is lack of information to exploit business opportunities/
lack of benchmarking.

5. Please indicate the degree to which you agree with the following statements concerning
technology factors.
S.N Technological Factors 5 4 3 2 1
5.1 There is lack of appropriate machinery and equipment.
5.2 There is lack of skills to handle new technology.
5.3 There is lack of capacity to deploy and use information
technology.
5.4 We are unable to select proper technology.

6. Please indicate the degree to which you agree with the following statements concerning
Politic-Legal factors
S.N Politic-Legal Factors 5 4 3 2 1
6.1 The tax imposed on my business is not reasonable.
6.2 There is bureaucracy in company registration and licensing.
6.3 There is lack of government support.
6.4 There exists political intervention and corruption.
6.5 The implementation of government proclamation, regulations
and directives related to my business operation is not
uniform.

7. Please indicate the degree to which you agree with the following statements concerning
infrastructural factors.
S.N Infrastructural factors 5 4 3 2 1
7.1 There is a frequent electric power interruption.
7.2 The water supply system is insufficient and with frequent

XII
interruption.
7.3 There is lack of business development services (supporting
institutions).
7.4 The transportation services are insufficient and not quick.
7.5 There is lack of appropriate dry waste and sewerage system.

8. Please indicate the degree to which you agree with the following statements concerning
working place factors.
S.N Working Premises Factors 5 4 3 2 1
8.1 We have no adequate own working premises.
8.2 The current/existing working place is not convenient for
running business.
8.3 The rent of working premises we are requested to pay is too
high.
8.4 We are unable to access land for business expansion.

SECTION-3: PERCEIVED BUSINESS PERFORMANCE


1. Please indicate the degree to which the following statements concerning Performance of
your business.
S.N Performance Measurement 5 4 3 2 1
1.1 The growths of our business profit aren’t satisfactory.
1.2 Our capital isn’t growing well as we expect.
1.3 We aren’t satisfied with the Growth in sales of my products
and/or services.
1.4 We aren’t satisfied in our operational efficiency.
1.5 The company employee loyalty and turnover is disappointing

At last any comment you have please: _________________________________________


________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________

Thank you in advance for providing me your precious time!!

XIII

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